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Outline
Background
Sound corporate governance principles
Background
Background
Organisation for Economic Co-operation and Development (OECD) is international standard-setter for corporate governance
OECD issued corporate governance principles in 1999 Basel Committee issued guidance in 1999 applying OECD principles to banks Late 1990s/early 2000s: corporate scandals
Foundations of effective corporate governance are important but may be beyond supervisory control:
Macro-economic policies System of business laws Market integrity and transparency Accounting standards
Banking supervisors should be aware of impediments to sound corporate governance and take steps within their power to promote effective foundations
Everyones responsibility
Board and senior management are primarily responsible for effective corporate governance
Others can help promote sound bank governance:
Shareholders Auditors Industry associations Governments Banking supervisors Stock exchanges and securities regulators Employees
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Established by Basel Committee to review guidance Incorporated elements of 2004 OECD principles Discussed lessons learned from corporate governance breakdowns Met with industry groups and rating agencies Consulted with non-BCBS supervisors Issued consultative paper in July 2005 Final paper expected late 2005/early 2006
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Apply to a wide range of banks and countries Applicable to diverse corporate and board structures Principles, not rules Not as prescriptive as some national legislation
Strategic objectives and corporate values Clear lines of responsibility and accountability
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Establishing strategic objectives and a set of corporate values that are communicated throughout the banking organisation.
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Potential conflicts of interest arising from activities of the bank should be:
Identified
Prevented or appropriately managed
Information barriers between different units
Appropriately disclosed
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Setting and enforcing clear lines of responsibility and accountability throughout the organisation.
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Unclear lines of responsibility can make problems worse The board of directors should:
Define authorities and key responsibilities Oversee management actions
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Ensuring that board members are qualified for their positions, have a clear understanding of their role in corporate governance and are able to exercise sound independent judgment about the affairs of the bank.
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Independent directors
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Should have necessary skills to manage business and exercise appropriate control
Oversee line managers consistent with board policies
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Effectively utilising the work conducted by internal and external auditors, as well as other control functions, in recognition of their critical contribution to sound corporate governance.
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Should be: Independent Competent Qualified Identify problems in risk management & internal control Ensure financial statements are accurate
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Recognise importance and promote throughout bank Enhance independence (e.g., limit non-audit services) Auditors have duties to bank and its stakeholders Consider rotation of audit firm or lead audit partner Utilise audit findings and require timely correction Report to the board or audit committee External auditors review internal controls Independent directors meet in the absence of bank management with external auditor and heads of internal audit, compliance, legal functions
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Ensuring that compensation policies and practices are consistent with the banks ethical values, objectives, strategy and control environment.
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Compensation should be consistent with: Long-term business objectives and strategy Corporate culture Control environment Should not overly depend on short-term performance Board (or independent committee) should approve compensation Policies re: trading bank stock and granting/re-pricing stock options
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Transparent governance
Necessary for shareholders, other stakeholders and market participants to monitor and hold accountable the board and senior management Need information on corporate structure and objectives Complex cross-shareholdings can impede transparency At a minimum, all banks should make disclosures to supervisors
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Related-party transactions
Full annual financial statement with supporting notes and schedules
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Maintaining an understanding of the banks operational structure, including operating in jurisdictions, or through structures, that impede transparency (i.e. know your structure).
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Operational structure
Some bank operations may lack or impair transparency Particular jurisdictions (e.g. some offshore centres)
Banks may provide services or establish opaque structures for clients Often legitimate and appropriate business purposes
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Supervisory concerns
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Clear policies and procedures should be in place Approval for use and sale
Need for such activities should be regularly assessed Corporate governance expectations should be established for all relevant entities Activities should be subject to enhanced audit procedures and internal control reviews Assess compliance with applicable laws, regulations and internal policies and procedures
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Supervisory role
Supervisory questions
Do internal and external audit functions conduct independent and effective reviews?
Are major shareholders, directors and managers fit and proper? Will an individuals skills and experience contribute to bank safety and soundness? Does criminal or regulatory record make a person unfit?
Is a group structure managed in such a way as to negatively impact management of the bank?
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Unique challenges
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Controlling shareholders
State-owned banks
Two-tier boards
Some countries adopt a two-tier board of directors (e.g. management board and supervisory board)
Basel Committee recognises that both one-tier and two-tier boards may be appropriate Two-tier boards may be structured differently across jurisdictions, so no specific guidance Whichever structure is used, principles of sound corporate governance should be in place
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Conclusions
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Wrapping up
Banks have a unique role in the economy, so targeted corporate governance guidance is appropriate
Key elements:
Board of directors = oversight Senior management = internal controls Supervisors = promote and assess sound governance
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Questions or Comments?
Kirk Odegard Member of Secretariat Basel Committee on Banking Supervision Bank for International Settlements kirk.odegard@bis.org
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